Why GDP Doesn’t Bode Well for Jobs

By Sarah Morgan

The U.S. economy may be growing faster than it has in more than a year, but today’s fourth-quarter GDP report also comes with a potentially bad sign for jobs, analysts say: lower spending on services.

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The economy grew 2.8% in the fourth quarter, the Commerce Department reported today. That’s significantly stronger than the 1.8% growth seen in the third quarter, but falls short of the 3% growth economists had expected. But the fourth quarter’s weaker spending on services is particularly worrying for the jobs market, which had shown some signs of improvement, analysts say. After a 1.9% increase in the third quarter, spending on services grew only 0.2% in the fourth quarter. “That’s the sector that creates the jobs for us,” says Robert Brusca, the chief economist at Fact & Opinion Economics.

Consumer spending overall was a bit weaker than encouraging holiday sales reports had suggested, says Beth Ann Bovino, the deputy chief economist at Standard & Poor’s. And most of the 2% growth in personal consumption expenditures came from a sharp 14.8% increase in spending on durable goods, while roughly two-thirds of Americans’ jobs come from the services sectors, Bovino says. That’s discouraging, but because services spending had been increasing for the previous two quarters, it’s too soon to tell if it’s the start of a major downward trend, she says. “I still think the recovery is in place, but maybe it’s a little bit weaker than we thought just yesterday,” she says.

Indeed, even though GDP now appears to be marching steadily upward — from 0.4% growth in the first quarter of last year, to 1.3%, to 1.8% and now 2.8% — the first quarter of this year is likely to interrupt that improving trend, says Robert Johnson, the associate director of economic analysis at Morningstar. In part, the fourth quarter looks stronger because of stronger inventory buildup, which rose 1.9%. And in turn, that stronger inventory number is largely due to a rebound from unusual weakness in the previous two quarters, Morningstar’s Johnson says. “I think the auto industry got way behind the curve with the tsunami, and now they’ll finally be able to bring inventories back to a normal level,” he says. Overall, growth in 2012 is likely to be faster than in 2011, but this is still a half-speed recovery, he says.

For investors, today’s weaker report could well be the start of a string of less-encouraging data, which would tend to drag the market downward, says Rodney Johnson, the president of HS Dent. Very conservative investors should consider Treasury bonds in this environment, while more aggressive investors could bet on a strengthening dollar, Johnson says. Particularly since the euro has been rising in the past couple of weeks, an ETF like the PowerShares DB US Dollar Index Bullish Fund (UUP) could benefit from a reversal of that trend, he says. In general, “investors should be moving to fixed income, because the Federal Reserve told you straight out we’re going to make interest rates go lower for a long time,” he says. “So any yield you can find you’d better grab with both hands.”